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The stock market is a market that sells pieces of companies to the public. Many large companies sell stock as an extra source of revenue. Read on to learn how companies sell stock, how a stock's value is determined, why participating in the stock market can be so risky, and even a brief history on the stock market.
If you own stock, that means you own shares of a company. A share is self-explanatory; you own a part of a certain company. Depending on how fine the company splits the shares (meaning "how many shares the company makes"), you may or may not own a lot of the company (while owning one share). If you own 1 share of a company, which has a total of 10 shares, you own 10% of that company! When you own such a percentage of a company, you have a say in the way the company is ran.
You could brag to everyone that you own 1,000 shares of a company. But people may get confused. Although 1,000 seems like a large number, remember that stock shares are parts of a company, it may not be a majority of the company. If the company you own stock in has a total of 1,000,000 shares, you only own 0.1% of that company. Not very impressive.
A share's value is determined by this formula:
(total value of company) divided by (total # of shares)= the value of one stock
So, if a company is worth $500,000; and has 500 total shares, let's do the math:
500,000 divided by 500= 1,000
The cost per share for this company is $1,000.
Whenever someone buys stock, that makes the company money. This adds to the company value, making the cost of stock rise a little. Example:
500,000+1,000(the new income)=501,000
501,000 divided by 500= $1,002
$1,002 is a single share's new value!
Before a company begins selling stock, the company is private; this means that there is only one share for that company (worth the entire value of the company), and that share is owned by the company's owner. If a private company wants to sell stock, the company goes public, which means that more than one person (the public) owns the company. The company must decide on how many shares to split the company into. Every time someone buys a stock, the company gets that money (adding to the value of the stock), but the chairman (that's what we now call the previous owner, because now everyone is the owner, not just him/her) can no longer use that share for his/her own power over the company.
If the number of free shares (meaning unsold shares) comes to a low number, the chairman may want to do a split. This means that the total number of shares is split in two. 500 shares is now 1,000 shares. Every previous owner of the stock now gets double the number of shares, but the value of each share is worth half of it's original value. Owners who got their number of shares doubled didn't make any extra money on the split.
You've probably heard on the news "Microsoft makes it's share holders money today!" or "General Electric is one of the safest stocks around!" And, by no doubt, companies selling stock will try to lure you into buying their stock. So, the media and commerce world may make you think that the stock market is all well and good. The stock market does have it's advantages, but it is also very risky.
First off, the stock market is unpredictable. Occasionally, when a company announces a hot new product, you can tell that that company's stock is going up. But other than that, it is unpredictable. This makes it extremely difficult to judge when it is a good time to buy or sell. You may buy stock at $45, thinking you bought at a good, low price. But it may drop to $25 the next day. You lost $20 and an opportunity to save $20. Or, if you sold stock at $75, thinking it is a good, high time to sell, it may soar up to $100 the next day, and then you lost the opportunity to make an extra $25. You should get the idea by now.
In the 1920s, the American stock market was booming. People got loans to buy stock, promising their loan brokers that the stock will go up and pay the loans off. But, some stocks didn't go up, leaving the shocked share holders in further debt. Some owners of stock were also the owners of their own business, and had to fire their workers to pay off the debt. This left the former workers unemployed and in poverty, unable to buy anything from stores. Now the stores couldn't make any money, and this set off a chain reaction across the nation which caused the Great Depression. This spread poverty, unemployment and misery across the nation and the world, for that was a time where many countries needed America's financial help to recover from the devastations of World War I. After a few years, President Franklin Roosevelt made up a plan to get America back on it's feet. The Great Depression lasted from 1929 to 1932.
The stock market continues to be an excellent source of revenue for companies participating in the market, and in many cases, the public as well.
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